TCS Daily

High and Dry

By Carlo Stagnaro - July 21, 2005 12:00 AM

Italy is lucky that in the past couple of weeks it has seen quite a lot of rain. Otherwise the country might have faced a serious water crisis.

Despite official statements that situation was under control, river levels -- including that of the biggest in Northern Italy, the Po river -- were dangerously low. Coldiretti, a farmers' association, warned that resources for irrigation would last no longer than 21 days. If enough rain hadn't come, farmers were going to apply for compensation for lost crops (as if government, or taxpayers, were responsible for, or had any influence upon, the weather.)

The farmers' opportunism may be questionable, especially if you consider that agriculture is already strongly subsidized in Europe. However the problem is more general. How is it possible that Italy has to face severe water scarcities every single summer? It's not just about particular weather conditions; it's that everybody knows that hot seasons tend to be dry or very dry, yet nobody does anything to prevent the consequences. The reason is that Italy has failed to implement a meaningful process of liberalization and privatization in the water market. As a matter of fact, water is a local monopoly managed by companies that are formally private. They are owned, mostly or totally, by municipalities. This results in political price-making. In other words, water prices tend to be artificially low because no politician is willing to take responsibility for increasing it.

These low prices have two main consequences. The first is a lack of investment in infrastructure. According the National Institute for Agricultural Economics, up to 50 percent of the water transported in Italy leaks out because of poor maintenance of the pipelines or due to illegal water tapping. That means that, all else being equal, if infrastructures could be fixed Italian water resources would instantly double.

Secondly, and perhaps even more important is this: a price tells you about the relative scarcity of a good. Low prices mean that there is plenty of water, thus consumers understand that there is no reason for them to use it efficiently -- the cost of efficiency measures are greater than the price of wasted water. Geographer Yves Lacoste pointed out that water use for agricultural purposes is "irrational" -- "too often exaggerated volumes of water are spent in irrigation."

In fact, water use is perfectly rational. It's the price system that is irrational. If water were managed by truly private companies, prices would increase in drier seasons, and that would provide an incentive for consumers to make efficient use of the resource. Probably water would no longer be wasted as it is now by consumers. Farmers would grow those crops that can better adapt to the local climate, and water-intensive industries would move to regions with less or no drought.

Evidence from many places where prices have been left free to change confirms this view. For example, a study performed in six sub-regions of the United States showed that a 10 percent increase in the price of water would result in between 3.75 and 12.63 percent less consumption of water for urban residential purposes. Privatization also leads to a better management of pipelines. After water was privatized in England and Wales in the late 1980s, almost 50,000 kilometers of pipeline were fixed.

Water shortage is not a failure of the market. In fact it is the absence of a free market that creates all the conditions for water to run off during dry seasons.


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